Warnings about a sustained spike in east coast gas prices are forcing manufacturers into costly and riskier deals for supplies, and could eventually push some to embark on gas trading should those prices eventuate, according to industry experts.

Energy industry consultant Graeme Bethune at EnergyQuest said manufacturers who had delayed signing up new gas contracts had inked a string of deals over the past months to lock in supplies.

He said if prices for new contracts rose, as he expected, as high as $12 per gigajoule in Queensland, some manufacturers that had already contracted gas at lower prices could find it more profitable to cut back their own operations and sell their gas on to the liquefied natural gas producers (LNG), as happened in Western Australia after the Varanus Island gas exploration in 2008.

“If you’ve got contracts to buy gas for power generation or even for some industrial users, there’s going to be a pretty strong incentive not to use all that gas for power generation or industrial use, but to sell some of it to the LNG producers," Dr Bethune said.

Eastern Australia’s gas market is going through a period of massive change with the development of LNG export projects in Queensland, the first of which is due to start production this year.

Prices for domestic users, which historically have been around $3.50 to $4 per gigajoule, have already surged to about $8 for new contracts.

The federal government warned in a study released earlier this month that prices could rise above the export-equivalent price, where they could remain “for several years".

Alarm at price hikes

Related Quotes

Company Profile

The surging prices have alarmed manufacturers, who are complaining that price hikes being demanded by gas producers threaten their livelihood and don’t stack up, given the country’s plentiful gas resources.

“All the assurances in the world on the generous natural gas endowment that Australia has are not translating to available supply not just to industry but on projections, the impact on pricing of domestic gas as well," said Ben Eade, executive director of Manufacturing Australia, whose members include Amcor, Brickworks and Incitec Pivot.

“Australians could quite feasibly be asked to pay one of the world’s highest prices for gas: despite how that may sit from an economic rationalist perspective it doesn’t pass the common sense test in my view."

According to the government study, gas production in the eastern states will need to increase from over 700 petajoules a year at present to nearly 2300 PJ by 2016 to meet domestic demand and consumption needs by the three LNG projects in Queensland.

It said a “critical source of uncertainty" was whether coal seam gas resources in Queensland will be produced in time to meet LNG plant start-up schedules, potentially putting more pressure on the market.

Slow development of CSG in NSW has added to the expected supply difficulties.

Many industrial gas buyers have been caught on the hop on energy supplies, having relied on a misplaced assumption that either the Queensland LNG projects would never get off the ground, or that they would lead to an oversupply of cheap gas available for local use in advance of the LNG processing units ramping up to full capacity.

Incitec Pivot
said last month it would be hit by $50 million a year in extra costs at its largest plant, due to a hike in prices of gas threatening to drag the operation in the red.

New supply

The new 23-month gas supply contract for Phosphate Hill in Queensland, which comes into effect in February 2015, is believed to be with
AGL Energy
.

Orica
struck deals for gas last year with
Strike Energy
and with Esso/BHP Billiton at Longford, while
Amcor
’s packaging spin-off Orora this month took an option over yet-to-be-proven gas in the Cooper Basin held by Strike.

Orora
chief financial officer Stuart Hutton described the option as a “risk mitigation" exercise, given large price increases demanded by larger producers. “Our first desire is to secure supply, because we need to secure the manufacturing opportunity for our assets," he said.

If the option is exercised, the gas would be used at Orora’s glass furnaces in Gawler, South Australia.

Expectations of moderating Asian LNG prices should however prevent anything other than a relatively brief spike in domestic prices, which will be increasingly driven by LNG netback prices, according to Tony Wood, energy program director at the Grattan Institute.

“The combination of the very high prices that the Asians are, reluctantly, paying [as high as $19] and the absence of alternatives, means that the domestic price that aligns with export parity is indeed around $10 or even a tad more," Mr Wood said.

“However, as the buyers get together, alternatives emerge – and maybe even the Japanese nuclear power stations are turned back on – [and] delivered prices in Asia should move more into the range of around $14 or so, meaning a domestic parity price in the $6-$8 range."